It would be fair to say that new strategies have been relatively ‘light on’ over the past few years in the superannuation space. So, when the industry gets wind of a new strategy that arguably changes the game for transition to retirement income stream (TRIS) recipients, the excitement certainly lifts amongst SMSF professionals.
The decision in private ruling PBR – 1012925066548 effectively allows a TRIS pension to be taxed as lump sum (where a valid election is made before the payment). This PBR further opens up the use of the TRIS election strategy for individuals between 56 – 59 years of age that may not have previously benefited due to high levels of income and already maximising their concessional contribution cap.
The Australian Taxation Office (ATO) issued a statement on their website on 11 January 2016 highlighting their awareness of the growing interest to utilise strategy and raised their concerns for those looking to implement the TRIS election strategy.
It is recognised by the ATO that in certain circumstances a member can elect under regulation 995-1.03 of the ITAR 1997 for a TRIS payment to be treated as a lump sum payment for tax purposes, rather than as a super income stream. This allows for the individual to have the amount assessed against the member’s low rate cap (currently $195,000 for 2015/16), rather than assessable income taxed at marginal tax rates.
TRIS election strategy – How it works
To understand how this TRIS election strategy works, I have included the example used in my recent ‘Top 6 strategies for 2016’ webinar:
It is important to distinguish how this strategy plays out between the various superannuation and tax laws where a member chooses to make this Reg 995-1.03 election. Whilst the amount is treated as a lump sum and reported as such within the individual’s tax return, the nature of the payment from the SMSF does not change for the purposes of the super laws.
With an increased level of activity around the TRIS election strategy, the ATO has made clear that a range of complexities exist with such transactions in conjunction with the special features of a TRIS. As a result, it is important that trustees (and those providing advice) consider these number to ensure the SMSF’s compliance.
The ATO has highlighted that:
- It is the nature of a TRIS payment for superannuation regulatory law purposes that is relevant to a trustee’s compliance with the 10% TRIS payment annual limit.
- If the TRIS payment is not a lump sum for super regulatory law purposes, it cannot be paid by an in-specie asset transfer – this is in contrast to partial commutation arrangements set out in SMSFD 2014/1.
- Electing for a TRIS payment to be treated as a super lump sum for income tax purposes may affect the amount of the SMSF’s exempt current pension income for an income year and whether particular fund assets are segregated current pension assets.
- Electing for a TRIS payment to be treated as a superannuation lump sum for income tax purposes will affect which super-related tax offset/s may apply to the payment.
Given the amount of exposure and discussion this strategy has attracted, it would be likely that the ATO will provide further guidance the near future by the ATO on this matter.
The overarching question is whether this outcome in the treatment of such benefit payments was the intent of the policy? Overlay this with the future viability of transition to retirement as a strategy (see recent AFR article on call to end TRIS loophole) and it may be worth considering these issues sooner rather than later.
I would say ‘look before you leap’ when it comes to implementing this TRIS strategy – before proceeding it would be prudent to obtain a private binding ruling from the ATO until such a time that further guidance has been issued by the Regulator. We’ve made submissions already for several clients, so if you require any guidance on this matter, we can certainly assist.
For further details on the ATO’s recent news item, see https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/News/SMSFs-and-transition-to-retirement-pension-payments/